Sunday, May 3, 2009

If companies are too big to fail, that means we're in a spot where we're privatizing profit and socializing risk. That kind of spot is a great place to be if you're a stock holder (although, as we've learned recently not THAT great a place), but it's a crappy place to be if you're a taxpayer.

We learend recently that AIG was too big to fail, and AIG wasn't even the biggest corporation around. If it's bad for a company to be that big, what can we do to encourage companies to be smaller?

We also mentioned around here that marginal costs are better for smaller companies, and fixed costs favor larger companies. So, if we want companies to be smaller, we should look to reduce the fixed costs associated with being a company.

What are some of those costs?

Well, compliance with regulation is one. Lobbying the government (a.k.a. "rent seeking") is another.

If we really decide that economies of scale aren't enough to make up for the instability that comes from super-complicated mega-conglomarates, we should do whatever it takes to make compliance and lobbying costs stay high for big corps while reducing or eliminating them for smaller companies.

Low cost of entry is what made Silicon Valley possible. Granted, that industry crashed too, but it was nowhere near this bad.

Now, look around. Does it seem like we're doing all we can to reduce corporate rent-seeking, too-big-to-failness, and fixed compliance costs for smaller firms? If not, why not?